Vegetable Oil Price Rally Stalls Ahead of Key Reports

Profit-taking drove vegetable oil prices lower on Friday, but the declines were modest in relation to the sharp moves higher this week. For the week, soybean oil prices gained more than five percent, and palm oil futures rose more than 5 1/2 percent. Energy prices dropped sharply on growing concerns about the economic impact of the reacceleration in coronavirus cases in the United States and Europe. The potential for a smaller-than-expected stimulus package from the U.S. Congress also contributed to the 4 1/4 percent (December contract -$1.65 per barrel) decline in the benchmark West Texas Intermediate (WTI) contract.

Soybean oil futures fell less than 1/2 percent (December contract -13 basis points per pound). However, the benchmark contract remained above the upper Bollinger band. Buying at that level limited the decline while selling just above Thursday’s high limited an attempt to rally. Traders are looking forward to the United States Department of Agriculture’s monthly World Agricultural Supply and Demand Estimates (WASDE) report, scheduled for release on Tuesday. Position squaring ahead of the report will likely drive price action on Monday, but traders’ reaction to the report will be the most significant influence over the balance of the week. USDA may not make substantial changes to its U.S. soybean oil balance sheets, but its 2020/21 U.S. soybean balance sheet projections could substantially impact both soybean and soybean oil prices. Analysts expect USDA to reduce its estimate of the U.S. soybean yield and raise its 2020/21 U.S. soybean export forecast, lowering its ending stocks prediction. There is some potential for the USDA report to trigger a sharp increase in soybeans, lifting the benchmark contract to test the 36-cent level and its early January high just below 36.5 cents. However, If USDA’s report is less bullish than expected, soybean oil prices could fall back to the 34-cent level. However, bullish world vegetable oil fundamentals would likely limit any decline.

Palm oil prices dropped about 3/4 percent (January contract -27 ringgit per tonne), leaving the benchmark contract back under the 3,200-ringgit level. The decline also drove the December contract back below the upper Bollinger band. Palm oil prices fell despite a sharp increase in Chinese vegetable oil prices, with palm oil and soybean oil futures jumping about 1 1/2 percent on the Dalian exchange. Palm oil traders are looking forward to the monthly supply and demand estimate from the Malaysian Palm Oil Board (MPOB) to guide the market following its release on Tuesday. Analysts expect a decrease in production and an increase in exports to tighten inventories from the three-year low reported in September. If stocks fall more than expected, the benchmark contract could test the 3,400-ringgit level in the coming weeks. If the MPOB data is more bearish than expected, the January contract could fall below the 3,100-ringgit level. However, any decline is likely to be limited if Chinese futures continue to rally, given the influence of Chinese prices on palm oil futures.